The Return of Active Management
Larry Hatheway, GAM chief economist and Head of Investment Solutions
Index-hugging equities are unlikely to deliver in 2017, driving the return of active management. Pseudo-active investment strategies that follow the herd and shy away from conviction bets look set to fail as the scope for general market gains is small compared to the more pronounced divergence of returns along regional, sector, style and stock-specific lines. Pockets of value exist in equity markets, but broad-brush strategies have localised gains overshadowed by the slow performance of the wider market. We are moving more towards cyclicals and the beneficiaries of currency weakness, such as the Japanese equity market, while paring back emerging-market weightings. In the fixed income universe, rising yields will undermine the foundation of risk parity.
Tim Love, Investment Director for emerging market equities
Vietnam, Argentina, Romania and Pakistan represent a collection of geographies, languages, histories and business cultures with one thing in common: they each offer major growth opportunities. The VARP economies are over 13 times smaller than the BRICs and therefore we do not expect them to help drive the global economy in the same way, or to generate the same levels of returns for investors. However, these markets can offer a deeper dimension to an emerging markets portfolio with potential attractive risk returns – because of their diversity.
US Bank Growth
Davide Marchesin, Fund Manager in GAM’s non-directional equity team, Lugano
We are seeing a major inflection point in the growth outlook for US banks. They are set to benefit from milder regulation, a widening of net interest margins as the yield curve steepens, and low provisions as the economy reacts to fiscal stimulus. Consequently, going long the market, particularly select regional names looks like attractive positioning. Another financial theme that is growing in prominence is the lower intervention of the US government in businesses such as student lending and mortgage insurance, where we see private players regaining market share following the contraction during the Obama administration.
European Defence Contractors
Gianmarco Mondani, CIO of GAM’s non-directional equity team, Lugano
We are starting to see some interesting prospects among European defence contractors. After several years of revenue declines, led by budget discipline, heightened geopolitical risks are likely to lead to better revenue prospects than the market currently estimates.
Jonathan Stanford, Senior Fund Manager in GAM’s non-directional equity team, Lugano
Convertible bonds could prove very interesting in 2017. They allow investors to gain exposure to the equity market, while owning fixed income assets, which seems a good fit for an environment in which nobody wants bonds and the majority are nervous about equities. The short duration characteristic of convertibles prevents over-exposure to rising interest rates. As a spread asset, the credit component allows for greater yield opportunities or valuation upside in a relative value arbitrage scenario. The rise in interest rates would usually call for an increase in primary market activity in convertible bonds. The comparative competitiveness toward other assets will increase, prompting companies to choose convertible debt issuance over corporate bonds or bank loans. This will allow for more diversity, a renewed pool of assets and greater liquidity. The possibility of inflation, backed by stronger economic growth, would bode well for the equity market, and thus would allow convertible bonds to appreciate thanks to their strong equity exposure, and further credit tightening.
The ‘Tutti Frutti’ Portfolio
Scilla Huang Sun, Portfolio Manager for luxury equities
The macro environment is currently quite volatile and will remain so in 2017, with several binary political events on the horizon. Investors should bring the benefits of ‘tutti frutti’ effect to their portfolios, being well diversified from a top-down perspective (we own growth companies, momentum stocks, defensive names and ‘fallen angels’). At the same time, one must keep a bottom-up focus on companies with strong brands and cash flow generation that can gain market share. We are confident that the positive trend seen in the third quarter of 2016 will gain further momentum, and are convinced of the secular growth potential of the luxury goods industry.
Equities Unaffected by Currency Moves
Reiko Mito, Portfolio Manager for Japanese equities
2017 is the time to buy Japanese companies that can grow regardless of exchange rates. The volatility of the Japanese yen is understandably a nightmare for the managers of domestic companies. Nevertheless, we are keen to invest in companies that can grow no matter how the currency moves. FX rates inevitably affect companies’ financial statements in the short term, which can be either a positive or a negative. We look beyond the short-term impact to underlying fundamentals. It is more important for us to analyse whether the impact is just the translation effect, or whether the company is eventually losing or gaining competitiveness.
The Comeback of Discretionary Macro Investing
Christian Gerlach, Portfolio Manager for commodities
Like the 1970s, market volatility will spike in many markets during the next few years. The forces of populism, inflation and currency devaluations will destroy the post-2008 investing consensus (staying long low-volatility assets). As a pandemic of fat-tail events will undermine many beloved investing approaches, returns will start to cluster around the most flexible approach possible – discretionary macro.
M&A in Healthcare
Christophe Eggman, Investment Director for healthcare equities
M&A will remain a prominent feature of the sector going into 2017, and we expect to see an acceleration of this trend in the coming quarters. For many companies M&A is a necessity – not just an option – in order to grow, and a way to offset a potential loss of pricing power. Deal drivers include large cash balances, repatriation of offshore cash back to the US, attractive acquisition targets, the quest for growth and lower tax rates. Another performance catalyst is Trump’s proposed corporate tax reform, including a repatriation bill for offshore assets, which will certainly accelerate capital deployment.